CommentEverything in his hypothesis depends on with what version of Adam Smith Andrew Lo is comparing Charles Darwin. As he doesn’t state what he thinks Adam Smith’s Works said about evolutionary changes, it is not possible to judge the credibility of Lo’s proposition.

Smith had a social-evolutionary approach to his entire corpus of Work. He demonstrates this in his earliest essay, usually known by its short title: ‘History of Astronomy’ (c. 1743-48), compiled in the main while still an MA student at Oxford (Essays in Philosophical Subjects, Liberty Fund, 1982).

The same social-evolutionary approach is demonstrated in his ‘Considerations Concerning the First Formation of Languages’ (1761), also published in the 3rd edition of The Theory of Moral Sentiments (1767), and available in his Lectures on Rhetoric and Belles Lettres (Liberty Fund, 1983).

The Theory of Moral Sentiments (1759) is a major example of his social-evolutionary approach to the development of moral sentiments within a behavioural framework. As are his Lectures on Jurisprudence [1762-3] (Liberty Fund, 1978). His most well known Work, The Wealth of Nations, much of it delivered in his Glasgow lectures, 1752-64, is thoroughly social-evolutionary in structure.

Hence, I do not know from where Andrew Lo draws his suggestion that we turn from Adam Smith’s legacy, as he wrote it, to Charles Darwin. I consider them both compatible in approach, Smith less explicit maybe, but definitely not at variance. Towards the end of his article, Andrew Lo mentions ‘rationality’ and if this is an expression he associates with Adam Smith’s legacy. I suggest he is careful in case he imposes the modern paradigm of homo economicus on an 18th-century philosopher who did not subscribe to such an entity in what he actually wrote.

Smith always wrote about how people behave, not how they may be assumed to behave, and certainly not as they ‘ought’ to behave to fit the arguments of rational calculus.

Count Your Blessings - it could be much worse; it might get better

“Inequality imperilling nation, book of essays contends”A book review by Cecil Johnston, 30 March"Inequality Matters: The Growing Economic Divide in America and Its Poisonous Consequences," edited by James Lardner and David A. Smith; New Press ($25.95)”

“Most of the essayists, all of whom identify themselves as progressives, say the pollution of the political process by money is the greatest contributor to inequality. As journalist Bill Moyers puts it: "What has been happening to working people is not the result of Adam Smith's invisible hand but the direct consequence of corporate money, intellectual activism, the rise of literalist religious orthodoxy opposed to any civil and human rights that threaten its paternalism, and a string of political decisions favoring the interests of wealthy elites who have bought the political system right out from under us."“"Inequality Matters" is a must read for everyone who hopes to see equality of opportunity restored to its rightful place among the American dream's most cherished features.CommentI picked this up and read the usual misleading reference to Adam Smith’s ubiquitous invisible hand, which turns up all over the place – this morning in Concorde, Massachusetts and this evening in the Middle East.

Reading some of the other articles about big style financial affairs in Saudi Arabia I couldn’t help thinking that if the regime, income distribution and lifestyles of the Arab people in Saudi was transferred to the USA the middle class would really have something to moan about.

Who does the work for the corporate elites in both countries? Yes, the middle class and working people.

Who packs the Churches and Mosques of the ‘religious orthodoxy’ in both countries? The middle class and ill-educated working people’s families.

Who wrote the essays? ‘Progressives’.

In the USA people have votes, including women. Use them.

Take the long view. Like Smith did. Nothing changes quickly. Vote for the least worse candidate, irrespective of party. Support the least worse policy. Avoid chasing for perfection. Reject 'Men of System'. You won't be disappointed that way.

Invisible Hands no 33

“The collapse of the dot.com boom of 2000, facilitated a recession, that hurt the technology sector upon which much of the businesses that filled up those buildings were based. This is a regional problem. The same dynamics that filled those buildings in the first place, are the same forces that are keeping those buildings empty today. Adam Smith's invisible hand guides the market, not well-intentioned local public policy.”

Richard J. Dennis, Jr.Beach Drive

CommentShakespeare’s ‘bloody and invisible hand’ does not ‘guide the market’ and Adam Smith did not claim or assert that it did. There is nothing invisible about the way Smithian markets work, nor how modern markets work.

In fact, I have long doubted if there is such a thing as ‘the’ market; there are as many markets as there instances, people and places engaged in transactions.

Read Adam Smith’s only instance in ‘Wealth of Nations’ in which he used the lonely metaphor at WN IV.ii.9: pages 455-56.

By the way: Richard Dennis, Jr. rants about business rates v residents’ rates. He argues that lowering business rates raises residential rates – a zero sum outcome. Yet empty office buildings do not pay taxes from tenants because absent businesses suffering from hard times raise no income to local authorities – a zero-zero sum.

That local taxes amount to (by his assessment) ‘only’ 1 per cent of the costs of doing business (see his letter) may not be as important as the percentage that such taxes are of business profits – and whether such calculations mean anything to Richard or not is besides the point. If it deters or causes hesitation in the mind of potential tenants about renting empty buildings it has the effect of keeping the buildings empty.

Wednesday, March 29, 2006

Invisible Hand no 32

A very popular Blog author, seeking help from his audience of economists, asks for comments on his proposed syllabus for his 101 class of mature adults in economics:

“I am starting with the basic law of Supply and Demand, Incentives, then on to Utility for individuals and Profit Maximizing for firms, Smith's Invisible Hand.”

40 comments – yet not one commented on the inclusion of ‘Smith’s invisible hand’!

This is where the abuse of Adam Smith’s legacy begins. The tutors teach what they heard from their tutors, and their students go on to teach what they heard to the next intake of students in their classes, or write about economics in Blogs, media pieces or in speeches to clubs, re-unions and friends at dinner parties.

What few of them do is actually read Adam Smith and the single example in ‘Wealth of Nations” of his use of a lonely metaphor, which was not his, but Shakespeare’s (Macbeth, 3:2), and had nothing to do with a ‘theory’ of markets, or even about markets.

Sad.

Read the piece for yourself (and note that the rest of the Blog is good value):http://bigpicture.typepad.com/comments/2006/03/econ_101_class.html

Smith on the Separation of Church/Mosque and State

Interesting piece in The New Yorker (April), a magazine of which I know little other than I recognise its title, but of which recently I am quite impressed with the quality of its writing, having now read two of its books reviews on the net.

A recent one caught my attention. It is a review of Daniel C. Dennett’s new book, ‘Breaking the Spell’, by Allen Orr (‘The God Project: what the science of religion can’t prove’).

“Finally, Dennett describes a recent theory according to which the spread of religions reflects the action not of Charles Darwin’s natural selection but of Adam Smith’s invisible hand. As the rational-choice theorists Rodney Stark and Roger Finke argued in their book “Acts of Faith” (2000), human beings, when confronted with imperfect information, behave in a way that is generally rational. So if you believe (rightly or wrongly) that there is a God, it can be perfectly rational for you to engage in exchange with this well-heeled partner (even if the commodity you most desire can be delivered only post mortem). Stark and Finke are not, then, so much concerned with why people believe in God as with how believers act and why religious institutions spread. Their key claim is that churches mediate the complex exchanges between mortals and their gods. People go to church, in other words, for much the same reason they hire a real-estate agent: when something important is at stake in a complex transaction, it pays to get professional help.This theory may explain, as a corollary, why a larger percentage of Americans attend church than do, say, Western Europeans. The reason, according to Stark and Finke, is that Americans enjoy a free market in religion. While we have, more than a thousand denominations Europeans often have centrally planned state religions that put barriers in the way of competition and provide little in the way of diverse religious products. “The American religious economy,” Stark and Finke conclude, “surpasses Adam Smith’s wildest dreams about the creative forces of a free market.”

CommentAdam Smith wrote a longish section on education by religious agencies in ‘Wealth of Nations’, which is generally, though understandably, leapt over by impatient economists brought-up on the arguments of functions. More is the pity, because it explains something about Adam Smith’s views towards religious institutions in 18th century Scotland and the rest of Europe, at a time when Europe was not too far from where Islam is today in the societies that it dominates.

Religious institutions, their practices and consequences, were (and still are) one of the determining factors in the nature and cause of the wealth of nations. If a dominant religious doctrine hinders, inhibits or directly opposes those factors that interest economists in economic growth, it should be of more than passing interest before they make policy recommendations that ignore those very same influences.

However, my current focus is on the last sentence of the extract from Allen Orr’s review:“The American religious economy,” Stark and Finke conclude, “surpasses Adam Smith’s wildest dreams about the creative forces of a free market.”

What were ‘Adam Smith’s wildest dreams’? Not surprisingly, Smith was sceptical about state sponsored monopolies in religion, for all the usual reasons.

‘The interested an active zeal of religious teachers can be dangerous and troublesome only where there is, either but one sect tolerated in the society, or where the whole of a large society is divided into two or three great sects; the teachers of each acting by concert, and under regular discipline and subordination. But that zeal must be altogether innocent where the society is divided into two or three hundred, or perhaps into as many thousand small sects, of which no one could be considerable enough to disturb the publick tranquillity. The teachers of each sect, seeing themselves surrounded on all sides with more adversaries than friends, would be obliged to learn that candour and moderation which is so seldom found among teachers of those great sects, whose tents being supported by the civil magistrate, are held in veneration by almost all the inhabitants of extensive kingdoms and empires, and who therefore see nothing round them but followers, disciples, and humble admirers. The teachers of each little sect, finding themselves almost alone, would be obliged to respect those of almost every other sect, and the concessions which they would mutually find it both convenient and agreeable to make to one another, might in time probably reduce the doctrine of the greater part of them to that pure and rational religion, free from every mixture of absurdity, imposture, or fanaticism, such as wise men have in all ages of the world wished to see established; but such as positive law has perhaps never yet established, and probably never will establish in any country: because, with regard to religion, positive law always has been, and probably always will be, more of less influenced by popular superstition and enthusiasm’ (WN V.i.g.8: page 792-93).

When I read this section of Book V first, some years ago, I was struck by it novelty: let a thousand sects flourish! For this to work the society would have to take measures to prevent any one sect becoming dominant, and the separation of Church and State in the USA and France seemed steps in that direction. That no such similar separation has occurred in Britain is worrying.

In France the challenge to the separation of Church and State (or rather Mosque and State) comes not from the albeit dominant, though separated and largely inactive ‘great sect’, the Roman Catholic Church, but from a new, immigrant sect, the Moslem religion, which is dominant, with a vengeance, in some of the home nations of recent immigrants into secular France.

If there are to be a multitude of sects within the Moslem religion, besides the two of Shi’ite and Sunni (who gladly kill each other in the Middle East, it would probably come from within the Diaspora, albeit severely inhibited by the murderous treatment of apostates among some of its adherents.

In America, the separation of Church and State is under siege from the Christian tradition, even though it is divided into ‘more than a thousand denominations’. These denominations have a common cause this side of a blurring of the separation of Church and State, though perhaps not if one or two of the dominant ‘great sects’ within the thousand sects appear to be favoured by the legislature nationally or in individual states, other would change their minds. There is no doubt that any degree of dominance, Federal or local, would have the effect of heightened inter-communal tensions.

Smith did not think that his suggestion for a thousand little religious sects would lead automatically to social tranquillity. In this, as in other matters, including free trade, he remained sceptical of universal conclusions of preferred reforms; but he also believed that some steps towards a desirable goal were better than similar steps away from such goals. As I have noted several times on ‘Lost Legacy’, Adam Smith was never a fanatical extremist on any of the policies he advocated.

I am not sure that he ever had 'wild dreams', or at least any he was prepared to share with posterity.

Tuesday, March 28, 2006

Smith on Relative Poverty

Mark Thoma raises an interesting point against certain ‘fans’ of Adam Smith, by which he appears to certain mean people of a ‘rightwing’ disposition in the US who quote extracts from his works, or more commonly, make attributions about what he said or meant that bear a slim connection with what he clearly intended.

To this end Mark Thoma quotes from an article in The New Yorker by John Cassidy on Mollie Orshansky's development of poverty statistics (long, but worth it): 'Relatively Deprived: how poor is poor?'

The perennial issue is whether poverty should be measured in relative or absolute terms. Broadly, the Right prefer absolute measures because these show considerable income improvements over time in affluent, thriving capitalist economies, and the Left prefer relative measures because these show smaller improvements through time because the poverty threshold constantly rises as average living standards rise ahead of the income levels of the poorer section of even thriving economies.Mark Thoma quotes Cassidy who quotes Smith (I have corrected minor inaccuracies in transcription and punctuation in the text as Cassidy quotes it):

“The concept of relative deprivation was first described by Adam Smith in “The Wealth of Nations,” in a passage on the “necessaries” of daily life:‘By necessaries I understand, not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-laborer would be ashamed to appear in publick without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, no body can well fall into without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England.’For decades, economists overlooked Smith’s analysis, and it was left to sociologists and anthropologists to study the impact of relative deprivation.”You will find this quote in ‘Wealth of Nations’ (WN V.ii.k.5: pages 869-70; Glasgow Edition 1976).

CommentI make no comments on the issues separating Right and Left on the important conceptual issue of absolute v. relative poverty on this occasion, except to acknowledge the importance of always knowing to which concept a contemporary refers.

There are two points I should make. First, Smith goes on to say, immediately after his reference to shoes being a ‘necessary of life in England’:

‘The poorest creditable person of either sex would be ashamed to appear in publick without them. In Scotland, custom has rendered them a necessary of life to the lowest order of men; but not to the same order of women, who may, without any discredit, walk about bare-footed. In France, they are necessaries neither necessaries neither to men nor to women; the lowest rank of both sexes appear there publickly, without any discredit, sometimes in wooden shoes, and sometimes bare-footed. Under necessaries, I comprehend, not only those things which nature, but those things which the established rules of decency have rendered necessary to the lowest rank of people. All other things I shall call luxuries; without meaning by this appellation, to throw the smallest degree of reproach upon the temperate use of them. Beer and ale, for example, in Great Britain, and wine, even in the wine countries, I call luxuries. A man of any rank may, without any reproach, abstain totally from tasting such liquors. Nature does not render them necessary for the support of life; and custom no where renders it indecent to live without them.’ (WN V.ii.k.3K pages 870-71).

This second paragraph suggests that the poverty line varies within and between countries. What is regarded as part of the necessaries of life in the 18th century for the very poor in England is different from what is regarded as such in Scotland, even though given the climates of both countries within Great Britain one might think that shoes for everybody in Scotland would be more necessary than in the slightly warmer climate of England.

I have seen photographs of 19th century women, and children playing, in Edinburgh’s streets without shoes on; an English observer would have thought their absence signified a deeper degree of poverty (relative and absolute) obtained in Scotland, yet on Smith’s judgement such a conclusion would be problematical, apparently because Scottish observers would have disregarded a lack of shoes among women and children as evidence.

Apparently, the relative poverty boundary shifted according to the perceptions of observers who would judge where the boundary between necessaries and luxuries happened to settle at any moment in time. So, if a low income family in the USA did not have a colour tv set, the boundary would rise above those poor who had them. As more consumer goods of that ilk spread throughout a population poverty levels judged relatively constantly rise as a society became more affluent. It is this type of consideration that causes problems for critics of relative poverty measures in economics (leaving out the politics).

A similar problem exists, perhaps, with inter-generational comparisons of relative poverty. Children of affluent parents express their discontent with their parents by deliberately dressing down, living scruffily, repelling consumer aids to more comfortable life styles and also indulging in what their parent’s generation consider to be ‘indecent’, including illegal drugs. Just a thought.

Monday, March 27, 2006

If scientists can get it right, why can’t economists?

It certainly grabbed my attention. No, it’s not nonsense about theories of the ‘invisible hand’, myths about ‘laissez faire’ or silliness about incorrigibly selfish ‘economic man’. It’s right on the money instead. It’s from Anjana Ahuja’s ‘science notebook’.

Research scientists looked closely at Smith’s first book, ‘The Theory of Moral Sentiments’ (1759) and are using its insights into human behaviour to explain research results that otherwise would stump them.

This is not surprising really; so many well-trained economists, proud of their prowess as the ‘hardest’ of the ‘soft scientists’, and over-loaded with competence as applied mathematicians, have ignored Smith’s initial writings in his main field of competence: moral sentiments, and, inconsequence, have created, or rather let loose on popular perceptions (repeated endlessly in the media) of a one-dimensional market player.

The problem with giving false authority to ‘anything goes’ greedy behaviours is to sanction them, as Geko put it, as ‘good’. It works against how most people prefer to behave and gives the small minority of socio-paths a license to behave as many ‘economists’ say they must: ‘go out and crush the competition, fool the consumer, ignore moral restraints and fill your pockets in the process.

Anjana Ahuja reports:

“During the past ten years scientists have confirmed Smith’s insights. People who trade money with strangers in a laboratory setting have an instinctive sense of fair play and reciprocity; chimps and capuchin monkeys also possess this instinct. These non-human primates display, just as we do, a sense of trust in response to generosity, and resentment in the face of selfishness. Such brooding resentment, in fact, that volunteers (and chimps) will often forgo reward in order to punish selfish participants.Such experiments have spawned a new branch of economics called neuroeconomics. And with this have come some surprising ideas about how markets should operate.” Professor Paul Zak, from Claremont Graduate University in California, is reported to have concluded from recent studies that:

“we need a compromise — a skeleton of formal regulation to stop the sociopaths taking advantage, fleshed out with plenty of self-regulation. Thus, we have a neat scientific explanation of why moderately regulated economies are the most creative and thus the wealthiest.We can’t rely on people to be angels, but too much enforcement risks inhibiting people’s natural mechanisms,” concludes Zak, who spoke last week at a Cambridge University conference on whether moral values are essential in business. “And any regulations have to reflect our underlying, innate sense of values, otherwise they won’t be followed.”

CommentRecent corporate corruption trials are not a sign that markets don’t work. They show the appropriate end reached by to those who apply the amoral image of ‘greed is good’ corporate leadership.

Meanwhile, more economists should read Adam Smith on ‘Moral Sentiments’ (there is a most inexpensive edition unselfishly published by the Liberty Fund: click on Amazon) and then read or re-read ‘Wealth of Nations’.

[Read The Times article in full at: http://www.timesonline.co.uk/article/0,,6-2105062,00.html]

Saturday, March 25, 2006

How Do Intelligent People Get into such Avoidable Mess?

There appears to be some disturbing elements at work in the market for student loans, at least in the USA. In a piece that could only appear in a US newspaper, protected by a welcome degree of freedom of speech not found elsewhere (certainly it would be risk to speak so wildly in the UK). So I shall confine my comments to the issues raised by monopoly practices, protected by law.Alan Collinge writes in the Baltimoresun.com: “Student borrowers over a barrel” (22 March).

“And Sallie Mae doesn't want anyone else on the playground. Its spokesman, Tom Joyce, smugly predicted recently that the legislation preventing the refinancing of student loans should make smaller lenders think twice about entering the market.Combine this with Sallie Mae's acquisition of many of the largest non- and for-profit student loan companies and default collection agencies (with no end in sight), and one can easily see why even the most conservative thinkers (including finance columnist and commentator Terry Savage, the Adam Smith Society and others) are beginning to question how free this market really is.Sallie Mae's response to this sort of criticism has been to say that it has broken no laws. This may well be true. But as anyone who is familiar with this industry will tell you, Sallie Mae doesn't need to break the law; it has already bought it.”

Comment

Adam Smith wrote extensively about government sponsored monopolies, as in the Royal Chartered trading companies, such as the East India Company, in none too flattering prose. His experience of them was so prejudicial that he dismissed the role of joint-stock companies as being efficient, or ethical. In sum, he considered they had pillaged the countries they had worked, with the exception of the Hudson Bay Company, protected from competition by the additional barriers to ‘independents’, on top of legislative protection provided by its Royal Charter, from its location in the barren wastes of northern Canada and an atrocious climate.

In the USA a student loans organization, ‘Sallie Mae’, dominates the sector. Some students fall into debt, by carelessness more than mis-selling by Sallie Mae employees, which itself is worrying. One would think that students educated enough to gain admission to a campus university would be protected by their above average intelligence to an above average degree from signing documents they do not understand. This is worrying, and, strangely, is even admitted by Alan Collinge:

“Unfortunately, these students don't think twice about signing their student loan papers. In fact, most unfortunately, these students don't think twice about signing their student loan papers. In fact, most don't even bother to read the fine print - or the bold, for that matter.”Speaking from a negotiator’s point of view, I often advise managers at the Business School where I have taught for 22 years (now retired, but I still deliver once a year the Negotiation class in the MBA course):

“Beware: in contract negotiations you only get the terms you agree to, and must do without the ones not included in the contract.”

So, if Collinge is right and most students don’t “even bother to read the fine print - or the bold”, then I must conclude that any complaints that follow when avoidable things go wrong for them should be referred to themselves for their lapse in the intelligent management of their business affairs. If they do not use their undoubted intelligence enough to protect themselves, should they be admitted to a university, until they wake up?

This does not relieve Sallie Mae from its own corporate responsibilities. Where opportunities for misleading customers abound – especially the absence of competition – it should worry corporate leaders who are implicated, inevitably, in suspicions about the conduct of their loan managers out of sight of adequate supervision. Also, it should worry legislators who allow such circumstances to arise, and who allow them to continue, when evidence exists of possible unfair trading practices. Monopoly markets always involve behaviours that act against the interests of consumers.

It should also worry universities, whose students get into this kind of avoidable financial trouble. If attention was paid by faculty to these problems, and preventing them, at least as intensely as they pay attention to diversity, gender equality and PC behaviours, it may be they could be spared suspicions of complacency in what appears to be a failure in their ancient role of ‘locus parentis’.

Friday, March 24, 2006

Professor Stiglitz in China

Joseph Stiglitz has a formidable reputation. Fu Jing of China Daily (21 March) interviews him on his take on the ‘intense debate’ in China ‘on whether calls for the government to launch social programmes would hamper the market economy’. From the extracts and summaries it is difficult to spot what are Professor Stiglitz’s words and which are Fu Jing’s.

The heading places in quotes ‘has a key role’, which plays well with Chinese government officials.

"There is not one form of the market economy but many (Fu Jing?). "And governments can play an important role together with Adam Smith's invisible hand," Stiglitz said.”

CommentClear enough. But he repeats the usual nonsense about the invisible hand, which presumably will spread round China with the authority of Professor Stiglitz. The next sentence could be Fu Jung’s or Professor Stiglitz’s:

“Smith, the 18th century Scottish economist and philosopher, is credited with laying the intellectual framework for the free market; and is famous for the expression "the invisible hand," which he used to demonstrate how self-interest guides the most efficient use of resources in a nation's economy, with public welfare coming as a by-product. "CommentSmith did not ‘use’ the ‘expression of the “invisible hand” to demonstrate to “how self-interest guides the most efficient use of resources in a nation's economy”. It was not about the allocation issue between resources in the national economy. It was about the unintended effects of human motivation (concern for the security of traders’ scarce capital) benefiting the national as opposed to foreign investments. In referred to ‘this case, and many others’ but left open whether self-interest was always beneficial in this manner.

From Smith’s writings on monopoly and conspiracies against consumers, he clearly saw limited benefits from unimpeded self-interest within a national economy. As a general proposition self-interest may be beneficial or may not be beneficial; which was decided on a case-by-case basis. Leaving it to ‘merchants and manufacturers’ was not a good policy.

“Stiglitz defined the government's role as providing public services such as education, health, pension and other social safety nets and enabling the market to function well.”

“He said he was glad to note that the Chinese Government has recognized the need for a transition in its role from setting growth targets in the past to building what he called an "institutional infrastructure" for a working market economy. China's 11th Five-Year Plan (2006-10) can be a major step in this transition, he said.”

CommentI am sure Professor Stiglitz did not enthusiastically endorse Communist China’s penchant for 5-year plans but was trying to nudge the planners away from central targets towards market infrastructure. Once China attends to its infrastructure a massive change in its overseas activity would follow and worries about is trade surplus will abate.

People more knowledgeable of Professor Stiglitz's views are better placed than I am to assess the credibility of the report.

No Alibi for Selfish Greed

Trivial op-ed piece of no particular serious significance, but it purveys the usual nonsense about Adam Smith in the guise of smart familiarity with things smart people pretend to know:

“There are many whose accumulation of vast wealth, however gumptious, does not fit the Adam Smith model of individual drive and greed being channeled into activities that benefit all.”

CommentThis was not a prediction by Adam Smith; only a possibility in ‘many cases’. He did not portray ‘economic’ man blithely going about his greedy business and, unbeknown to him, the joke was on him: no matter what he did it benefited society. What a rationalisation that would be for all the selfish behaviours a selfish man was capable of!

“Adam Smith explained how our individual efforts serve the common good. We work to produce things that can be traded for things we want. That's an improvement on making everything that we consume ourselves.”

CommentNot quite. Our individual efforts ‘may serve the common good’, but they need not. Monopolists, gullible legislators and separate men may do anything for themselves, but which may not always be for the ‘common good’ – it may note even be for their own good (drug and alcohol addiction).

In the case that Smith refers to (in that most famously misquoted passage in Wealth of Nations: WN IV.ii.9: p 456), he was speaking about the motives of those who preferred to keep their scarce capital stock close to their neighbourhood because of fears for its security. He was not, most decidedly not, talking about how markets operate, nor did this constitute a theory of markets, and nor was their anything mysterious about how markets worked.

Sure, the division of labour was an advance on doing everything for ourselves. Our propensity to ‘truck, barter and trade’ led to every wider and deeper division of labour which took stone-age humans from the absolute poverty of nature to what Smith called opulence.

But on the way there were a lot of behaviours that were less than qualifying as ‘for the common good’. Still are, in fact. But these facts do not seem to percolate very far into the writings of journalists. Worse, sloppy attribution to Adam Smith of half-understood and totally misunderstood ideas he had, gives them an authority they do not deserve.

“The first exchange of one caveman's dinosaur meat for another's rather attractive decorative rock started a process that, after millions of years, leads to DVD players at Wal-Mart that cost less than DVDs. Or something like that.”

CommentYes, this is about the clearest example of a complete confusion of the history of the human species. The dinosaurs and associated species died out 60 million years before the speciation of the Common Ancestor into what became ‘Hominids’ and Chimpanzees (4 to 6 million years ago). Humans evolved as a separate hominid species about 200,000 years ago.

Stone-age hominids (Habilus, Erectus) made the first stone tools about 1 million years ago. Hominids used stone tools to cut through carcasses they scavenged while fending off rival predators. It was that time to this that we arrived at DVDs, not 65 million years. An even better achievement that mythically chasing dinosaurs for dinner.

The drug trade is hardly a Smithian market. Drug gangs are oligopolists trying to become monopolists by killing rivals, not competing on price or quality.

Of all the anti-monopoly sentences Smith wrote I do not recall him associating markets with murderous violence or with disregard for the consumers. Quite the reverse. He would recognise such behaviour in theEast India Company, a chartered monopoly that devasted the Indian sub-continent.

On the latest misuse of the invisible hand metaphor and associating it with Adam Smith, I have no comment.

Wednesday, March 22, 2006

Adam Smith's Moral Markets

"Creating a Moral Economy" by Fred Block, The Nation 21 March, published on line: AlterNet.org: ‘The Mix is the Message’

“Market fundamentalism -- a dogmatic belief in the power of Adam Smith's "invisible hand" to create prosperity -- survived the Republicans' electoral defeat.”

CommentAt first glance thought it was going to be another one of those nonsense assertions about Smith, but it got better:

“In "The Lost Art of Democratic Narrative," published by The New Republic in March 2005, Reich argues that differences over economic policy have been fought out in American politics over the past century by appropriating four specific story lines -- the rot at the top, the mob at the gates, the triumphant individual and the benevolent community. The party that tells these stories most persuasively wins, he observes, and in recent years the prize has gone to the Republicans.”

CommentSounds good – a sound bite about politics, US style.

“This opened the way for the Republicans to invoke Adam Smith's mysterious mechanism of the "invisible hand" as the critical element that binds the other Republican stories together. Since the market can be relied on to coordinate all economic activity, the triumphant individual can be set free of government restrictions, and liberal elites can be dismantled.

This suggests that we could make the phrase "moral economy" serve as the organizing narrative for a revival of progressive ideas. The term has a long and rich history, but it is also shorthand for the argument that sustainable prosperity must be built on strong moral foundations. This is something that Adam Smith, one of the patron saints of market fundamentalism, understood, but it is a lesson that his contemporary followers have completely forgotten. Smith recognized that the pursuit of self-interest can only serve the common good if individuals are systematically constrained by moral sentiments.

CommentSee what I mean? Worth reading on to the rest of it before reacting.

“The essential idea was brilliantly expressed in the title of a 1980s bestseller, "All I Really Need to Know I Learned in Kindergarten." The guiding principles of a moral economy are familiar rules such as don't hit, take turns, play by the rules, listen to the teacher, don't waste food and art supplies, and be prepared to share. These principles produce order in the elementary school classroom, and they can also assure order and prosperity in our nation's economy.”

CommentYes, would fit in with Smith’s ‘Moral Sentiments’. How it will play in US politics is another matter.

Invisible Hand no 31

“Herman: Solidarity is the largest independent trade union in South Africa. It is organized in practically all the sectors of the South African economy. Solidarity operates in the Christian trade union tradition, is strongly focused on values, less government and the free market. It believes, however, that the market is only free if all role players are in balance. Adam Smith calls this “an invisible hand”. If government gains too much power, it becomes a government economy and is no longer free. If society becomes too powerful, it is a social economy and the market is no longer free, but if the shareholder gets too much power the economy is not free either. It then becomes a shareholders’ economy. The challenge is to find a balance that will bring a sustainable growth economy.”

Comment:

Hardly worth responding to: Adam Smith did not call anything an invisible hand. He used it as a lonely metaphor to explain how individual decisions could have unintended consequences – in his example for the good of the national economy. From this passing use of Shakespeare’s metaphor (MacBeth: 3: 2)It has been misappropriated by commentators today to be a ‘theory of the market’ (it wasn’t) and to claim it is 'law' that all self-interested actions by idnividuals wrok for the benefit of the community - some do but others don't.

Dirk Herman is the deputy general secretary of the Solidarity labor union in South Africa. He just finished a book, The Emperor Has No Clothes – Perspectives on Affirmative Action in South Africa, about affirmative action in South Africa, as well his Ph.D., Affirmative Action and Alienation – Guidelines for Employers, on the same topic.

Monday, March 20, 2006

Where do they get their ideas from?

“Lately, no economic theory has established itself as the successor to the those of Adam Smith, Marx and Keynes, who taught us that governments must spend (creating deficits) in order to fight unemployment and keep as many people as possible inside the cycle of work and consumption. Today, most governments have already run up huge deficits while unemployment remains at dangerous levels; in other words, they don’t have much room to manoeuvre’.

CommentSmith didn’t leave a ‘theory’ in the 18th century to be applied in the 21st century. He left a report on the millennia following the Fall of Rome. In it were several ideas and a methodology for analysing socio-economic change; not a prescription for policies in today’s vastly different economies and the two hundred years of history that separated his world from ours.

As for Karl Marx, he is no model for the 21st century – he caused enough problems in the 20th century through his successors efforts to replace markets with central direction. And Keynes has politely withdrawn from the scene following the high-tide failures of his policies.

I would have thought that Nikos Konstandaras would have drawn the connection between his assertion that ‘most governments have already run up huge deficits while unemployment remains at dangerous levels’ and his assessment of the consequence that ‘they don’t have much room to manoeuvre’. Unfortunately that is not the case.

Among his suggests he recommends that ‘unemployed graduates’ go from Europe to Third World to help them grow; that a new ‘Global Bureau’ be set up at the UN (obviously he is oblivious to the bureaucratic monstrosity that would create, plus the sheer expense) to supervise what he calls the ‘benevolent cycle’ from the presence of these unemployed graduates in Third World countries (doing what?); worse he slips in a proposal for official ‘islands of protection’ in Europe for ‘certain industries and farming’, ‘monitored and taxed’ to prevent countries ‘abusing’ the system, with the money collected going to a ‘fund’ ‘European professionals’ going to Third World countries that invite them in!

As Mr McEnroe used to say: ‘you can’t be serious!’ Unfortunately I fear he is.

In a separate page of Kathimerini, there is an editorial quoting: ‘Meanwhile, former PASOK public works minister Vasso Papandreou — evidently counting upon those with short memories who have forgotten the performance of the previous government during its eight-years in office — maintains that PASOK would have given workers’ double the wage hikes the current government has approved, that is increases of around 7 percent.’

It beggars belief.

As I have often asked my relatives in Greece: How did Greece get into the European Union?’ Partly, recent events have answered me: ‘Because at heart they are totally in tune with France, German, Italian and Dutch interventionist states, i.e., if there is any problem anywhere they believe the best answer is to get the State to tax and spend money on it.

You don’t need a new theory to deal with these problems. Just rely in examining their history and don’t repeat it.

Nash v Smith?

As the open source business ecosystem grows and matures, I'm finding it increasingly important for me to not only pitch my company's paid version, but also others'. Were I true Adam Smith, I'd argue that

...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

But I'm not. I'm with John Nash: I'm best served by helping myself AND my community. Smith would argue that my goal is to induce those around me, out of their own enlightened self-interest (he calls it "self love"), to serve my needs because it also serves theirs. I don't disagree.But I think there's a higher good, and one that best serves my community and myself in the short term. And that is, again, by actively trying to build up my community.Comment:This is the second time I have commented on a piece authored by Matt Asay (see below for 13 March) and on the same subject. I have no views on whether ‘open source’ is a good marketing move or not – I do not try to out-guess entrepreneurs who follow a strategy they consider beneficial. What I do comment upon is an apparent need for them to misinterpret the views of Adam Smith while prosecuting their strategy.

Businesses can sometimes benefit from making available an element of their intellectual property or an element of the apparatus needed to operate it for free or for the cost of distribution only. That is a business decision. I think here of telecoms and free handsets; Microsoft (retains the source code) and IBMs PC licensed to manufacturters (compared to Wang and Apple); HP, etc., and computer printers where the money is made in the inks; and Kodak and giveaway-priced cheap cameras.

Rosenberg and Asay call on Nash and criticise Smith; it is not clear they understand what either were saying.

The authors have a narrow view of Adam Smith’s moral political economy. Given the total dependence of everybody on everybody else in the commercial society with which Smith was familiar, he did not advocate that people should act selfishly.Quite the reverse, in fact. People had to co-operate even to get their dinner from the ‘butcher, the brewer and the baker’ (“Wealth of Nations”: WN I.ii.2: pp 26-7) and he expressly insisted that ‘self-love’ was not enough. It was necessary to appeal to the other party’s self-interest and not just to create sympathy for one’s own. Merely seeking one’s own self-interest faced the problem that if both parties act to a potential transaction involving ‘truck, barter and exchange’ there is likely to be no exchange transaction between them, unless one of them surrenders and take whatever price is offered.

However, if both were determined not to surrender, then the two solutions (i.e., two prices, two quantities, or two conditions) they bring to the table would never be mediated into the single solution (i.e., one price, one quantity, or one set of conditions) to which they can both agree.

In the absence of property rights exchange transactions would not occur. Now this can be arranged in individual cases, but resources are scarce. Benevolence is limited not by the goodwill will of people, but by the scarcity of the means to fulfil it. It is from markets that create wealth (the annual production of goods and services) that abject poverty is eliminated. Country’s with limited markets, no private ownership of the products of labour, capital and technology, no law of contracts and an independent justice system, are all sunk in deep poverty. The ‘pie’ for them has never got started. John Nash (of the film, ‘Beautiful Minds’) does not help.

For a start, Nash in his famous articles ignored the negotiating process by assumption, and set out the conditions for defining an optimum solution, none of which operate in the real world, e.g., perfect knowledge of each other’s numerical utility functions, perfect rationality of the players, and arrived at the mathematical proof that the parties would maximize the product of improvement of net utilities if and when his assumptions operated. Useful as a limiting case, but also hopelessly impractical. It showed what ought to happen, but, as David Hume showed, ‘ought is not is’.

While Nash was writing what ought to happen, Professor Tucker experimented with Prisoner Dilemma Games, producing some interesting results. In my experience of running thousands of such games with managers across business and public sector organizations, the most common result (92%) is for ‘defections’ among pairs, not for ‘Nash’ solutions. Players are not perfectly rational and they cannot be unless they have perfect of information about their partner's preferences (no hiding places for 'strategic' behaviours).

Imperfect information requires a degree of trust not found even when players engage in Prisoner Dilemma games over 'points' with no value. 'Defection' is both a 'protection' strategy and an 'exploitation' strategy. Yet firms co-operate too in certain circumstances. In fact, the whole of production is a co-operative game, as Smith showed. It isn't 'war'; it is the mediation of self-intertest through the exchange mechanism.

Neither requires we replace private property rights – its only practical to work with them. It relies on choosing between ‘doing what is best for self’ (definitely not a Smithian behaviour) and doing ‘what is best for both of us’ (definitely a Smithian virtue). Given that choice, working with the Smithian conditional proposition (‘Give me some of what I want and I will give you some of what you want’) we choose to do what is best for both of us.

The quotation by Dave Rosenberg and Matt Asay from ‘Wealth of Nations’ is torn out of its context. Smith was discussing the unintentional consequences of human motivation, which acts in the case he is discussing (whether to invest their capital stock locally or abroad, not about markets please note), but not always – it was not a universal rule – to work in favour of the community by concentrating investment locally and building economic growth faster in an 18th century economy that sorely needed lifting out of poverty. Rosenberg and Asay extrapolate from this single example of Smith’s into making it Smith’s general rule for inter-personal behaviour. It was nothing of the kind.

Neither ‘self-love’ nor ‘benevolence’ was sufficient. Nor, if I may say so, is adherence to a Nash ‘solution’, which requires the Nash perfect assumptions to operate for his conclusion to apply, but none of his assumptions operates in the real world! I trust that both Rosenberg and Asay have read the Nash articles on the ‘bargaining problem’, published in Econometrica in 1950 and 1953? I suggest they read them again.

Does Smith Qualify for This List?

Not wishing to be cantankerous for the sake of it, I am still uneasy about the (I hope) passing passion for lists. There are lists for everything almost. They are composed by often arbitrary criteria by selected ‘experts’, with the ‘awkward’ variations squeezed in or out, and the difficulties smoothed over, perhaps on the basis that the majority of readers will only look at the lists to see how they conform to their own prejudices; if they do the list arranger’s criteria counts for naught. When, on the other hand, a list does not conform to a reader’s prejudices, the criteria might be searched and if disputable (itself a subject for further dispute) will be mocked. In this vein, great rumpuses blow up. I once heard of a university holding an all-day emergency meeting of senior staff when it allegedly slipped from the top 3 spot to the top 5 in the ‘rankings’, as I hear that certain universities refuse to participate in rankings unless they are guaranteed a top spot, which, of course, would frustrate the alleged purpose and impartiality of the ranking criteria. There are, of course, many reasons for not participating in newspaper rankings – not the least that journalists are not the most impartial people to compile them and their main interest lies in selling newspapers and meeting copy deadlines.Melvin Bragg, a UK media intellectual of impeccable literary judgement and an ‘establishment’ figure in the ‘Arts’, has compiled a list of The World’s Best Books: ‘Twelve Books that Changed the World’ (April 2006, Hodder & Stoughton) and it may seem odd that I feel uncomfortable with the idea that Smith’s ‘Wealth of Nations’ is among them. Here is an extract from a press release:

“Newton took us to the moon; Faraday gave us electricity; Darwin took away God and the gods who had been there since civilisation began; Mary Wollstonecraft started the struggle for the equality of women and Marie Stopes for their right to control and enjoy their sex and family lives.

After Wilberforce the equality of the races was on the march and Magna Carta is the keystone of opposition to the exercise of tyrannic power. Our markets operate through the laws of Adam Smith, our imaginations are most exercised by Shakespeare, our work organised by Arkwright, our language and religious thought by the King James Bible and our world-dominating sport by the FA Book of Rules.”

‘Our markets operate through the laws of Adam Smith.’ Is this true? Have they ever operated through Smith’s so-called ‘laws’? His critique of mercantile political economy was precisely about markets not operating according to natural laws. He didn’t hold much hope of them every doing so. He considered it utopian to think that ‘free trade’ would ever be restored in Britain. He did not write a campaign leaflet as if he believed somehow that free trade was to be worshipped, anymore than Newton believed that gravity was ‘good’. Both men were analysts, not preachers.

Ignore gravity in the proximity of the roofs of tall buildings and there could be fateful consequences; Newton measured the exact velocity of an unfortunate victim’s fall. Intervene capriciously in the workings of an economy and there could be deleterious consequences for a nation’s wealth; Smith explained the nature of those consequences with examples from China and Britain.

The extent to which Smith ‘changed the world’ is debateable. His works largely have been ignored, and if applied at all, the applications have been highly selective and piecemeal, and as often have been quite different from what Smith suggested, even the reverse. Newton did not suffer a similar fate. His ‘laws’ are timeless. Smith’s apply in the long view of history with declining relevance as the 18th century recedes. Capitalism would have developed as it did whether Smith had written ‘Wealth of Nations’ or had stopped with ‘Moral Sentiments’; in a hard sense it did so develop, even with ‘Wealth of Nations’ in print throughout the 19th to the 21st centuries.

I shall read Melvin Bragg’s book with a degree of scepticism when it is published and comment here on how he expresses his judgement.

Saturday, March 18, 2006

Yes, Economic Growth Could Stop, but What a Price

In answer to the question: does economic growth ever stop?, the answer is, unambiguously, yes. It has, does, could and, perhaps, will again.

Anthony Black, an actor, asks these and other questions in his one-man show, now running at Neptune’s Studio Theatre, Halifax, Nova Scotia, Canada, as reported in The Chronicle by Stephen Pedersen, its Arts Reporter, 18 March:

‘Confronting ambiguity, uncertainty’ with the strap line: ‘Atom needs to get a life in Black’s remarkable, entertaining, one-man show’. Here is a paragraph from Pedersen’s report:“The ideas begin simply. They come from Adam Smith’s Wealth of Nations (does economic growth ever stop?), Isaac Newton’s discovery of the Law of Gravity (is it ever suspended?), and a thesis on sub-atomic particles, about to be presented by Atom’s wife for an advanced academic degree (is the atom, once thought inviolable, infinitely divisible?).”I have no comment on Isaac Newton’s Law of Gravity or on the science of sub-atomic particles, but I can comment on Adam Smith’s answer. He was well aware of the possibility of an end to growth, as were most of his generation who were schooled in British universities, where the long shadow of the former Roman Empire hung over their studies of its histories and language. Lectures, until the mid-18th century, were given in Latin, not English, literature was mostly read in Latin and ancient Greek, and as many allusions were made in both learned and literary works to events, plays, poetry and philosophy from ancient Greece and Rome as there were authors. Even the Founders cast their new republic’s institutions in the forms of the Roman Senate.

The Fall of Rome marked the fall of the first Age of Commerce, and with it, also ended its concomitant economic growth. These centuries became known as the Dark Ages; the economies of Europe reverted to barbarism and remnants of the economy retreated into local agriculture. For a thousand years there was no economic growth, with everything that went with[out] it.

Such an event – the sole cause of which was human destruction on a continent-wide scale – could happen again. There is no ‘law’ preventing what I call ‘Man’s Avoidable Disasters’ (MAD).

There is another end to growth scenario, which Smith includes in ‘Wealth of Nations’:

‘In a country which has acquired that full compliment of riches which the nature of its soil and climate, and its situation with respect to other countries allowed it to acquire, which could, therefore, advance no further, and which was not going backwards, both the wages of labour and the profits of stock would probably be very low. In a country fully peopled in proportion to what either its territory could maintain or its stock employ, the competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers, and the country being already fully peopled, that number could never be augmented. In a country fully stocked in proportion to all the business it could transact, as great a quantity of stock could be employed in every particular branch as the nature and extent of the trade would admit. The competition, therefore, would everywhere be as great, and consequently the ordinary profit as low as possible.

But perhaps no country has ever yet arrived at this degree of opulence. China seems to have been long stationary, and had probably long ago acquired the full compliment of riches which is consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of. A country which neglects, or despises foreign commerce, and which admits the vessels of foreign nations into one or two ports only, cannot transact the same quantity of business which it might do with different laws and institutions. (WN I.ix.14-15: pp 111-12)

I discuss this passage in ‘Adam Smith’s Lost Legacy’, pp 205-9 (Palgrave Macmillan, 2005). The end of growth problem Smith discussed was inhibited by a major missing ingredient in his analysis. He did not (and could not), and nor did anybody else, anticipate the massive serial changes and inventions in technology just ahead of his horizons that came in the 19th and 20th centuries, and, by all current judgements, look set to continue throughout the 21st century. These unforeseen events postponed, perhaps indefinitely, a country reaching its ‘full compliment of riches which the nature of its soil and climate, and its situation’ allow it to acquire.

But, in the case of 18th century China, Smith spotted something that may have relevance to future answers to the question. He asserted that China had: ‘long ago acquired the full compliment of riches which is consistent with the nature of its laws and institutions’. Fortunately for the poor people of China, and despite their compulsive residence in a theme park for the Communist Experiment, the ‘nature of their laws and institutions’ are changing; the road block is removed and, after six hundred years since the 15th century, they resume their economy’s growth, with a vengeance.

In addition to the negative reactions of some influential voices in the West from among rabid hyper-suspicious xenophobes through to Marxist environmentalists, and usually decent people and a few economists, the muffled drums of protectionism are shifting up a beat, albeit in the distance for now. So called ‘fair trade’, ‘what about the US deficit’ near- panicky voices, and the shriller of the doomsday ‘global-warming’ chorus, are on a converging course with the xenophobes towards changing the ‘nature of [Western] laws and institutions’ that, if carried politically, would so inhibit both technological change and the existence of market solutions as the main drivers of economic growth as to risk a re-run of the Fall of the Roman Empire and an end to economic growth.

I remain optimistic enough to consider markets will overcome such a ‘Man-made Avoidable Disaster’.

Problems at the Grassroots in Malawi

“There has been concern for sometime that certain business people in Malawi mark prices of their merchandise in foreign currencies such as US dollars and British pounds. Are they doing this to aggravate inflation and fleece the wretched ones of the earth?Primarily, these traders are responding to the natural instinct of self-interest and self preservation. Whether in doing so Adam Smith’s invisible hands leads them to do public good is a matter of debate.”

CommentThe columnist goes on to discuss the impact of inflation on business decisions and the availability, or rather the scarcity, of entrepreneurial talent. Inflation is a macro-question and must be squeezed out of the economy if development in Malawi is to take place. The lack of entrepreneurs in Malawi could be a micro-problem, related to risk, always made worse by the uncertainties of inflation.

D. D. Phiri gives an example from the grassroots:

“The average Malawian prefers business lines that sooner than later get cash flowing in. Unfortunately, these are over-crowded by “me also” business people. When one man opens a grocery at one spot soon others erect theirs nearby. When one man starts a minibus service in no time the country is flooded with minibuses, some of them with rickety seats and doors that are difficult to close.”

CommentWhat Malawi does, please don’t institute regulations to ensure taxi doors shut and the vehicles are ‘safe’. I know it sounds daft (even callous), but the army of inspectors needed to nominally enforce the regulations only adds to unproductive activity and to regimes of petty bribery, the last thing Malawi needs.

Make it easier to set up businesses, especially small businesses. Yes, there will be over-crowded markets but these find their own level pretty quickly - those losing money either find a way to make it from what they are doing, such as diversify into parcels carriage, repairs and auctions (competition!), or they turn their hands and money to some other line of business. It’s called mobility and flexibility (and the division of labour).

I liked the line: “Whether in doing so Adam Smith’s invisible hands leads them to do public good is a matter of debate.”

Of course, D. D. Phiri may not have meant by it the same that I would if I had written it, but he/she should hold on to that idea, forget about mythical ‘invisible hands’ and continue highlighting the problems on the ground, because that is where solutions will be found, provided inflation is beaten, law-and-order established, corruption reduced, then eliminated, and elementary work-disciplines become the norm not the exception.

Recently, the Scottish First Minister, Jack McConnel, announced an initiative from Scotland to regard Malawi worthy of Scottish support and assistance. I do not have much hope for this support if it only tackles problems at a government-to- government level (much talk and travel, not much impact), and I offer the advice to think at the grassroots level if self-sustainable development is to take root.

Scottish Presbyterian churches have a long history of a presence in Malawi (Nyasaland before independence – Blantyre is a place in Scotland, near Hamilton and Glasgow) and it may be appropriate if Adam Smith’s ideas are applied to the development phase as part of the initiative conducted under the aegis of the Scottish Executive.

Wednesday, March 15, 2006

“Entr’acte: guidance for our time from the age of light” by Alan Riding

“With the idea of giving these values a boost, then, the French National Library is offering a refresher course through May 29 in the form of a "look-backward-to-think-forward" exhibition called "Lumières! Un héritage pour demain," or "The Enlightened! A legacy for tomorrow."

In other words, Lumières to the rescue!

With borders porous to ideas, then, this could not be an all-French show. It proposes Isaac Newton, who died in 1727, as the undisputed founding light, with John Locke, David Hume and Adam Smith among other Britons; with Immanuel Kant, Moses Mendelssohn, Goethe and the dramatist Gotthold Lessing from Germany; Giambattista Vico from Italy; and Benjamin Franklin from the United States. Even Mozart gets a nod - the original score of "Don Giovanni" is on display, for his 250th birthday

Now, however, with things definitely not working well in practice here [France], there seems to be an urgent need for some fresh theories to help the French confront the uncertainties posed by globalization, religious fundamentalism, multiculturalism, European integration and their own dysfunctional political system

Theory, after all, is at the core of every ideology, even capitalism, a point Adam Smith illustrated with typical pragmatism: "It is not on the generosity of the butcher, brewer or baker that we depend for our dinner, but on their self-interest."

CommentThat France, well at least its National Library, is looking outside its borders for inspiration is interesting, and welcome, news. That Adam Smith is included is doubly interesting – his political economy was influenced (how much is controversial) by his correspondence and meetings with the French économistes (the ‘Physiocrats’) and he was not very sympathetic of French policies, even then, of political intervention (Colbert) in markets.

He would find today’s France infinitely more Mercantile regulated than it was in the 18th century. But then Britain, whilst less heavily regulated than France (only by comparison), is pretty much over-regulated in a Smithian sense.

France is a land stuffed with politicians who are ‘men [and women] of system’, chic to a fault, and uncompromising when it suits political advantage.

However, the theme is to "look-backward-to-think-forward" and that is as close as you can get to Smith’s philosophy. So is gradualism and respect for what exists and where it came from, with a strong aversion to sudden changes. These Smithian virtues play well in France, which made him a great favourite, with David Hume, in the Salons of Paris in 1764-6.

What the young will think of them today is at odds with those occasional outbursts of revolutionary fervour (a bout of which appears to be upon us on the campuses once again), that break-out to test the stoic temper of the State.

France does not take to being browbeaten by foreigners (it doesn’t like it from within, either) and reacts with stubbornness, not compliance, when foreigners try it (Memo to US State Department: try being less pushy).

Invisible Hand, no. 30

A variation on the misattribution to Adam Smith of the mystical qualities of Shakespeare’s ‘bloody and invisible hand’ (Macbeth 3:2) and its elevation from an isolated metaphor used only once in “Wealth of Nations” in relation to domestic versus foreign investment policy (and definitely not about markets, let alone a ‘theory’ of markets), is illustrated in a piece by Ernest Partridge in OPEDNEWS.com (http://www.opednews.com), entitled “The Right and The Left, in a nutshell” (his introduction to ‘Conscience of a Progressive’, described as ‘a book in progress’).

Ernest Partridge writes:

“Each individual, by acting to maximize his or her personal self-interest, will always act “as if by an invisible hand” (Adam Smith) to promote the well-being of all others in this (so-called) “society:” that which is good for each, is good for all. Accordingly, the optimal economic system is a completely unrestricted and unregulated free market of “capitalist acts by consenting adults.” (Robert Nozick) Moreover, private ownership of all land, resources, infrastructure, and even institutions, will always yield results preferable to common (i.e. government) ownership and control. Finally, the regressives firmly believe that because economic prosperity and growth are accomplished through capital investment, the well-being of all is accomplished by directing wealth into the hands of “the investing class;” i.e. the very rich, whereby that wealth will “trickle down” to the benefit of all others.”

Comment

I have nothing to say on the differences between ‘regresssives’ and ‘progresses’, at least as Ernest Partridge presents them, but I wish to draw your attention to his variation of what Smith actually said when he mentioned, en passant, the invisible hand (Wealth of Nations, IV.ii.9: p 456).

Smith wrote:‘…he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.’

Partridge wrote:

“…by acting to maximize his or her personal self-interest, will always act “as if by an invisible hand” (Adam Smith) to promote the well-being of all others in this (so-called) “society:” that which is good for each, is good for all.”

Can you see the difference? It is by no means a trivial slip of the pen.

Partridge shifts the statement from ‘led by an invisible hand’ to ‘as if by an invisible hand’, and by placing his version in quotation marks, immediately followed by ‘(Adam Smith)’ he asserts, in the conventional literary manner, that Partridge has made a direct quotation from the Works of Adam Smith. In this Partridge is in error.

If Partridge can show me a reference from the works of Adam Smith that Smith ever used the words ‘as if by an invisible hand’, I will send $1,000 to his nominated charity. The fact is, Smith didn’t express it the way Partridge asserts.

And neither can Partirdge assert that Smith claimed ‘that which is good for each, is good for all’. Manifestly, it is not always the case as Smith in many place states unambiguously. Monopolists do what is good for themselves, but is bad for consumers, who pay increased prices above the competitive prices brought about by competition; polluters lower their costs of production, or enjoy more ease, whilst others suffer externalities and the costs of cleaning up the mess left by polluters.

Smith never used the words ‘laissez faire’ and did not include such policies in his ‘Wealth of Nations’ – others asserted that he did, though the evidence against laissez faire in his book is overwhelming. Smith was not an extremist.

Smith’s words state: ‘he is in this, as in many other cases’, allowing for cases where, as above, his intentions do not lead to ends he intended and neither ‘will always act “as if by an invisible hand” (Adam Smith) to promote the well-being of all others’. There is no ‘will always act’ about it! Partridge’s claims about Smith are in error.

He should correct them before his book is published if he is committed to being accurate about those he quotes from. A case based on false evidence becomes no case at all.

Tuesday, March 14, 2006

At Last! Someone on Wall Street Puts the Invisible Hand in its Place

Trawling through web sites occasionbally brings forth the most amazing things. Has a financial commentator, spotted what so many others miss: namely the disconnect between Adam Smith and the invisible hand, so often attributed to him as an almost religious piece of imagery?

He writes:“But before we jump on decisions with which we don’t agree (even those that don’t succeed) to indict the entire process, consider Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, specifically, his argument that although the each decision-maker, for better or worse, considers just his own point of view, he is nevertheless “led by an invisible hand to promote an end which was no part of his intention” (Muller, page 66 quoting Smith at page 454).

Wealth of Nations is not Gospel. Perhaps Smith was off base. And there is much room to debate the true scope of the “invisible hand” phrase (Smith used it in the context of a trade-policy discussion). Regardless, it is often quoted in discussion of the philosophical foundation of western-style market economics, the system Buffett enthusiastically supports and in which he has flourished.

Might such an invisible hand be guiding individual acceptance of Wall-Street friction toward a more beneficial common end?”CommentFor Lost Legacy that is right on the money. Why, oh why can’t we have more economists educated in Adam Smith’s Works like Marc Gernstein? What is it that drives teachers at what are claimed to be the best universities in the world to spout their nonsense about the invisible hand; yet Marc Gernstein manages to get it right?

Wherever Marc Gernstein was educated in economics, congratulations to his tutors (assuming they imparted this knowledge to him as a student) or double congratulations to him if he learned it despite his tutors.

I will make it the Lost Legacy Prize Winner for March right now! You may imagine how excited I was to read the article (it says a lot more about investing and Mr Buffett and Wall Street, of interest to financial people, in which, I confess, I am not fluent) after a year reading mostly nonsense about invisible hands.

Invest in People, Leave Markets Alone

“Invest in people and leave the market to look after the rest”, says economist Dr. Calvin Jones, a member of the Welsh Economy Research Unit at Cardiff Business School and Director of Econactive, an economic consultancy, last weeks Western Mail, 8 March.

He continues in a spirited blast at government attempts (usuall futile) to intervene in the Welsh economy, citing several case of waste and unfulfilled ambitions.“The best thing politicians can do to help Welsh entrepreneurs win is get off the pitch,Keep strategic industries nationalised? Yes. A bit of not- so-subtle protectionism when Indian textiles became too popular? Of course.

But the day-to-day running of the economy was considered well-served by Adam Smith's "invisible hand".

This all changed in the 1920s of course, when the invisible hand of the market became a dead hand on the tiller as the global economy slumped into the Great Depression. The economist JM Keynes deduced a new rationale for government intervention: market failure.It is almost all in the labour market, and here is where the Assembly can do good work, and already does. Invest cleverly in Wales' people, and the rest will follow, albeit not for a fair while. And leave the rest alone.

Go on. Adam Smith would be proud.”

CommentsApart from the irritating references to Adam Smith and invisible hands, its main target is spot on: government and its expensive, usually wasted, expenditures on business activity. When a business fails the least advisable action is to pump in money. As bad is the habit of pumping in money to suppress markets which indicate the business should not be subsidised.

This detracts scarce capital from business opportunities, spotted by entrepreneurs who don’t need government officials to try to out guess what markets will tell them for nothing: if it needs support maybe it shouldn’t be subsidized; if it doesn’t need support, why subsidise it? This tends to undermine the full blast of efficiency.

Dr Calvin Jones is right to direct any spending on educating and training young people through the entire range of skills for the kind of jobs they would seek in a growing economy. This echoes Smith’s points about education in the 18th century as a justifiable expenditure by adults, partly from taxes and partly from their own commitments to educate their children (Book V, Wealth of Nations).

A far better investment to direct it to people than second-guessing what markets tell the business community for nothing. Meanwhile, go easy on the rhetoric of invisible hands – there are none in markets and Smith never said there was. See earlier posts on this subject.

Monday, March 13, 2006

Smithian Markets and Nash Equilibrium

Matt Asay writes in Infoworld.com:

“Open source in abundance....” [it’s about IT systems…]

I have taken four paragraphs (more would breach their copyright, and require IT translation): “Copyright, patent, trade secrets. These things are designed to exclude, to protect for one's individual benefit. Very proper and Adam Smith-ian of us, no doubt, but also arguably detrimental to both those around us and ourselves.

Which brings me to open source. We have an opportunity here. We can narrowly focus on self-interest, company by company. This, so classical, Adam Smith-style economics would tell us, is the way to maximize the overall "pie."

But John Nash's equilibrium theory and common sense argue that in parallel with self-regard and self-seeking we should also seek the good of the group.In seeking our own benefit we may tangentially benefit the wider population. But if we make enough room to maximize our own take while simultaneously seeking to do those things that will benefit the whole, I think we end up with a bigger market to monetize.”

Comment:Matt Asay has a narrow view of Adam Smith’s moral political economy, presumably because of the way Economics 101 was taught at his university. Given the total dependence of everybody on everybody else in the commercial society with which Smith was familiar, he did not advocate that people should act selfishly (the interpretation put on the meaning of ‘Smithian’ by Matt Asay).

Quite the reverse, in fact. People had to co-operate even to get their dinner from the ‘butcher, the brewer and the baker’ (“Wealth of Nations”: WN I.ii.2: pp 26-7) and he expressly insisted that ‘self-love’ was not enough. It was necessary to appeal to the other party’s self-interest and not just to create sympathy for one’s own. Merely seeking one’s own self-interest faced the problem that if two parties act this way there is likely to be no exchange transaction between them, unless one of them surrendered, but if both were determined not to surrender, then the two solutions they bring to the table would never be mediated into the single solution to which they can both agree.

Narrowly focussing on ‘self-interest on self-interest, company by company’ is a recipe for deadlock and strife. A copyright, patent, or trade secret enables its owner to bring to markets what they own and sell them, just as ownership of an amount of money (from earning it by working) enables people to go to markets as buyers. If nobody owned copyrights, patents of had trade secrets, nobody could own money and there would be no sellers or buyers. How then would that ‘maximize the overall "pie"?

It is the in the absence of markets that create wealth (the annual production of goods and services) that eliminates abject poverty. Country’s with limited markets, no private ownership of the products of labour, capital and technology, no law of contracts and an independent justice system, are all sunk in deep poverty. The ‘pie’ would contract.

John Nash (from the film ‘Beautiful Minds’!? – how about reading his articles; Econometrica 1950 and 1953?) does not help. For a start, Nash ignored the negotiating process by assumption, and set out the conditions for defining an optimum solution, none of which operate in the real world, e.g., perfect knowledge of each other’s numerical utility functions and arrived at the mathematical proof that the parties would maximize the product of improvement of net utilities when the assumptions operated. Useful as a limiting case, but hopelessly impractical. It showed what ought to happen, but, as David Hume showed, an ‘ought is never an is’.

While Nash was writing what ought to happen, Professor Tucker experimented with Prisoner Dilemma Games, producing some interesting results. In my experience of running thousands of such games with managers across business and public sector organizations, the most common result (92%) is for ‘defections’ among pairs, not for ‘Nash’ solutions. I have seen other results showing as few as 83% defecting pairs and 17% per cent of pairs, in place of my 8%, achieving Nash solutions, but experimental conditions and briefings may have varied. In short, not knowing each other’s numerical utility preferences causes defection from the Nash equilibria. I believe the same applies in real world bargaining over real issues between two parties.

Negotiators can learn to move towards a Nash Equilibrium by training in Smithian ‘conditional bargaining’ (see my ‘New Negotiating Edge: a behavioral approach to results and relationships’ (Breeley, 1998) or my MBA Elective textbook, Negotiation, Edinburgh Business School, (1991) 2000, but neither requires we replace private property rights – it works with them. It relies on choosing between ‘doing what is best for self’ (definitely not a Smithian behaviour) and doing ‘what is best for both of us’ (definitely a Smithian virtue), without destroying the operation of Smithian markets in the manner Matt Asay (naively?) suggests, the consequences of which would eliminate the manifest gains from markets in the form of the living standards of billions of people as effectively as the 20th-century experiments under various forms of Marxian ‘socialism’.

Smith and Friends Helped Change the World

“Flowering of ideas that built path to modern society: The Scottish Enlightenment”, by James Naughtie, (BBC Presenter on Radio 4) , writing in The Scotsman, Edinburgh, UK, 13 March:“Hume's empirical dissection of how we reason and how we feel - and his understanding of how an individual is shaped by the world around - was a feat of sheer brilliance. Ferguson foresaw the battle between liberty and tyranny that would come with social "advancement". Adam Smith, that much-abused thinker who has been hijacked so often for passing purposes, looked into the future of the merchants' world that was expanding around him.

The idea of progress itself, the engine of Victorian prosperity and self-confidence, came from the Scottish Enlightenment. The ideas that flowered in Edinburgh in the six or seven decades when the city was at its greatest were exported to the rest of the world and embedded in the new notions of democracy that would start to take root. The intensity of the philosophical debates that embraced Hume, Ferguson, Smith and the scientists such as Joseph Black and James Hutton would be felt for two centuries.”

CommentJames Naughtie is absolutely correct on Adam Smith (‘a much abused thinker’), a close friend of David Hume (the philosopher), Joseph Black (chemist and discoverer of latent heat), James Hutton (geologist and early analyst of how much older the Earth was compared to the prevailing religious mythology, and withJoseph Black a co-Executor of Adam Smith’s literary papers), and Adam Ferguson, who occasionally quarrelled with Smith, but was with him when he died in 1790.

eBay as a Smithian Market

“Pierre Omidyar's three laws” by Dan FarberPierre Omidyar, eBay founder, talked about his notions of choice, sustainable business models and social good. "Businesses can be a force for good. I recently rediscovered Adam Smith….If the baker sells bread to the shoemaker, the profit in the transaction is evidence that quality of life of baker and shoemaker increases. What we really want to do is to enable individuals everywhere to pursue their self interests in an environment, which doesn't lead to harm," Omidyar said. "When you unleash people to pursue their self interest, it ultimately leads to a better place."

Adam Smith has his rules, and Omidyar has his basic three laws for creating businesses the improve quality of life and enable social good. First, open access, which means a level playing field and transparency. "Anyone can join the club and there is transparency around the rules," he said. Secondly, individuals must be enabled to connect and interact with one another, leveraging collaboration and the wisdom of crowds. "It will inevitably lead to individual self empowerment within a given structure." Third is "skin in the game." Individuals have to make an investment to participate and be accountable for how they behave.”

Comment:Well, based on outcomes and the record of participants' behaviours, I think eBay (I have never used or visited the site, so I am unbiased) does a good job in connecting people in markets that leave both parties to a transaction (a few cheats and fraud excepted) better off, though not necessarily equally better off, which is the definition of a good deal. It approaches, may even attain, a Nash Equilibrium. I am sure that Adam Smith would have approved.

“But the intellectual battle on free trade is, more than ever, frustratingly hard to win. After all, for much of our evolutionary process, we, humans, have been hunters and have had to envisage our relationship with fellow humans as a zero-sum game in our quest for food, for a mate or for new territories. It is only recently that, with the complexity of modern economies, we have had to develop trust towards strangers in our economic relationships. In ‘The Company of Strangers,’ Paul Seabright (Toulouse) provides a brilliant exposé on the evolution of economic institutions.”

CommentThe evolutionary approach to societies of humans is the one I practice and this leads me to make the following comments in a most respectful manner, along the lines of Adam Smith’s model of the evolution of society (societies evolve much faster than species).

The statement that “After all, for much of our evolutionary process, we, humans, have been hunters and have had to envisage our relationship with fellow humans as a zero-sum game in our quest for food, for a mate or for new territories”, regrettably, is problematical. A few moments reflection would suggest that there is something unreal about the implications of this statement.

If hunters viewed their relationships as zero-sum in food, mates and territory then the ‘Hobbesian’ nightmare looms over our predecessors; the war of all against all’, etc. Now not even Hobbes believed his nightmare was true. He wrote, in reference to it that ‘It may peradventure be thought, there was never such a time, nor condition of war as this; and I believe it was never generally so, over all the world.’ (Hobbes, …[1651] 1946. Leviathan, p 83, ed. M. Oakshott, Blackwell, Oxford.)

Gatherers and scavengers preceded Smith’s Age of the Hunters, and as there never was a time when humans did not live in societies, they conformed to certain basic characteristics, if they were to live in any degree of harmony, as discussed in Smith’s ‘Moral Sentiments’ (1759). The first hominid societies were continuations of the societies of the Common Ancestor (as seen in primate societies today, especially our cousins the chimpanzees, bonobos, and gorillas), and the original division of labour was that females fed themselves and their children and all adult males fed themselves. Once the human brain began to evolve in 4-6 millions years from 400 grams (chimp size) towards 1400 grams (Homo sapiens’ size), food provision had to change if individuals were to survive (the human brain having a ferocious appetite).

Gathering, and catching small rodent-sized animals was insufficient nutrition, which led to scavenging larger game already dead, but taking this food source from rival predators determined to eat and kill anything in their way. This required a shift towards co-operation with the slow, gradual and cumulative evolution recognized by Adam Smith in all of his writings.

Individuals could not locate a carcass, defend themselves against predators, cut sufficient flesh and bones from it, and exit a site on their own. They had to do this with others. Those that managed this, lived long enough to breed and their children lived long enough to mature to become breeders. Those that didn’t became extinct, as was the fate of the associated c.20 hominid species, one of which evolved into the archaic human line that eventually split off to become Homo Sapiens.

This evolutionary process preceded the ‘complexity of modern economies’ by near on a million years. Of course, there was and still is a struggle between co-operation and non-co-operation, between trust and distrust and between violence and trade, but the duration of that struggle is much longer than Smith’s Age of Commerce (itself of older vintage than the 200 years of ‘modern society’). Smith’s ‘Moral Sentiments’ (1759) discusses how humans developed ‘trust towards strangers’ in all of our relationships, and not just our ‘economic relationships’.

However, Fazeer Sheik Rahim shows he is conversant with economics in its wider context, though he is conversant also with modern economics, in its formal mathematical sense. Consider the opening sentence of his article: “Nobel economist, Gérard Debreu once said that value is nothing but an element of the set of real numbers.” Makes me want to read more of his material…